Robert Rubin's Free Ride

How does Clinton's Treasury secretary escape blame for the market meltdown?

The housing bubble has burst. The financial services industry is a ward of the state. Insurance companies and automakers are tottering on the brink of bankruptcy. Consumer credit is drying up along with consumer confidence. Banks have stopped lending money, and big corporations have started laying workers off. The stock market is at a five-year low. But amid the greatest financial panic since the Great Depression, the market for one asset stubbornly resists correction: the immaculate reputation of Robert Rubin, former Treasury secretary and pre-eminent economic wise man of the Democratic Party.

Rubin hasn't been Treasury secretary since 1999, and he certainly bears less responsibility than Alan Greenspan, Phil Gramm, Christopher Cox, and assorted other Republican pooh-bahs. American voters, who are expected to favor the Democratic presidential ticket this Tuesday, aren't wrong to assign the principal blame for this crisis to the GOP. But the financial deregulation that allowed markets to boil over began well before President George W. Bush took office. Three decisions relevant to the market meltdown—two of them unambiguously bad in retrospect, the third a likely source of future trouble—can be attributed to Rubin.

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Derivatives. In 1998, Brooksley Born, chair of the Commodity Futures Trading Commission, proposed bringing derivatives under her jurisdiction. Rubin joined forces with Greenspan and Arthur Levitt Jr., then chairman of the Securities and Exchange Commission, to successfully derail the proposal in Congress. Rubin shared Born's worry about the derivative market's unregulated growth, and in his 2003 memoir, In an Uncertain World (co-authored by Jacob Weisberg, editor-in-chief of the Washington Post Co. unit that includes Slate), Rubin would later write that derivatives "should be subject to comprehensive and higher margin limits." So why did he oppose Born? Rubin doesn't discuss the episode in In an Uncertain World, but according to an Oct. 15 article by Anthony Faiola, Ellen Nakashima, and Jill Drew in the Washington Post, Rubin fought Born's plan for essentially political reasons: So "strident" a power grab by the CFTC, Rubin believed, would invite legal challenge, which in turn would create havoc in the derivatives market. Unfortunately, after killing off Born's proposal, Rubin never developed a less "strident" regulatory alternative—even after the September 1998 collapse of the Long Term Capital Management hedge fund, attributed in large part to its extensive investment in derivatives, demonstrated that concerns about these unregulated financial instruments were extremely well-founded. As a consequence of Rubin's obstruction and inaction, the market for one particular derivative—credit-default swaps—grew like a noxious weed. The credit-default swaps were unregulated insurance contracts on securities derived partly from subprime mortgages. If indiscriminate subprime mortgages were the vehicle that brought about the market meltdown, credit-default swaps were the fuel.

Greenspan. As the previous example demonstrates, in economic decision-making Rubin was often joined at the hip to Alan Greenspan, the Reagan-appointed chairman of the Federal Reserve Board who served until February 2006. (A famous February 1999 Time magazine cover dubbed Rubin, Greenspan, and Rubin's deputy and successor Lawrence Summers as "The Committee To Save the World.") Greenspan, whose press was once even more ecstatically favorable than Rubin's—Bob Woodward titled his 2000 book about Greenspan Maestro—has since been identified as the principal architect of the economic meltdown. That's not only because he resisted regulation of derivatives more emphatically than Rubin ("I think of him constantly cheerleading on derivatives," Greenspan's onetime deputy, Princeton economist Alan Blinder, recently told Peter S. Goodman of the New York Times) but also because he failed to rein in the subprime lending that created the meltdown and encouraged the housing bubble by keeping interest rates low. If Greenspan is Public Enemy No. 1, then the guy who got Bill Clinton to reappoint Greenspan surely ranks as Public Enemy No. 6 or 7. That would be Rubin. In early 1996, when Greenspan's term as Fed chairman was due to expire, Clinton considered replacing Greenspan with Felix Rohatyn. Rubin talked him out of it. In Maestro, Woodward makes clear that Rubin's view was shared by many others, including the more liberal Laura Tyson, who succeeded Rubin as director of the National Economic Council, and Vice President Al Gore. But Rubin's endorsement carried the most weight. Woodward crafts a tender homoerotic scene out of Rubin's telling Greenspan he's gotten the nod from Clinton:

Rubin was … at the G-7 meeting in Paris, where he and Greenspan had a chance to speak privately. Taking advantage of a quiet moment, they walked together toward a series of large plate-glass windows at one end of the room, with a view of Paris before them. The two men had established a feeling of trust, perhaps as much as two adult males in high government posts might find possible. For Greenspan, such friendship, closeness and agreement gave him a sense that they were working for the same firm. Greenspan had once remarked privately, and only half-jokingly, that he considered Rubin the best Republican secretary of the treasury ever, though he was a Democrat.

"When you get back," Rubin said, "the president's going to want to talk to you."

Greenspan could tell by the body language that it was all favorable.

Glass-Steagall. This1933 law prevented commercial banks from doing investment banking (and vice versa). In his 2002 book, The Roaring Nineties, Nobel Prize-winning economist Joseph Stiglitz (an adversary of Rubin's in the Clinton White House) identifies Rubin as a prime mover in the 1999 repeal. The principal argument in favor of repealing Glass-Steagall was that financial institutions—most notably, Citigroup, where since 1999 Rubin has been a sort of rainmaker/consigliere—had already worked out ingenious ways to circumvent it. New York Times financial columnist Joe Nocera recently pointed out that repeal of Glass-Steagall enabled Citigroup, J.P. Morgan, and Bank of America to survive while stand-alone investment banks Bear Stearns, Merrill Lynch, and Lehman Bros. went belly-up. The argument against Glass-Steagall's repeal was that it would encourage banks to extend too much credit to companies whose stock their financial arms were trying to sell. It has yet to be demonstrated that this conflict of interest contributed to the current meltdown. But as the crisis accelerates the sort of mergers made possible by the 1999 repeal—according to Nocera, the big banks that just received a $125 billion investment from Treasury are already saying, entre famille, that they will spend the money not on loans but on mergers—opportunities for such abuses will multiply. Another problem with bank consolidation is that it will create more financial institutions deemed "too big to fail." As Robert Reich recently observed in his blog, if government needs to bail out giant corporations because their failures would wreck the entire economy, that's an excellent reason not to allow these corporations to become so big in the first place.

Say what you will about Greenspan, he has publicly admitted error. So has Arthur Levitt. Rubin, though, is in no rush to voice regret, and no one seems inclined to press the issue.

Rubin's genius for avoiding bad press is legendary. In a rare critical piece about Rubin in the March 2007 American Prospect, Bob Kuttner wrote that in reviewing newspaper and magazine features published about Rubin during the previous two decades, he "literally could not find a single feature piece that was, on balance, unflattering." Kuttner missed a column I wrote in 2002 complaining about the scant coverage given to a sleazy phone call Rubin made to a Treasury undersecretary about Enron just before that company went bust. (Citigroup was one of Enron's biggest creditors.) But I take his point: As far as most journalists are concerned, Rubin walks on water. The man's ability to do so even as the deregulatory culture he helped foster comes crashing down—the only significant knocks I can find are in one column by Robert Scheer, one by Robert J. Samuelson, and one by Harold Meyerson—is nothing short of extraordinary.

Rubin's Teflon is so scratch-proof that Barack Obama can enlist him to represent his campaign on CBS's Face the Nation without worrying that John McCain's ever-more-desperate campaign will make an issue of it. The program's host, Bob Schieffer, asked not a single question about Rubin's roles in blocking Born's proposal to regulate derivatives, in reappointing Greenspan, or in repealing Glass-Steagall. Fareed Zakaria did a little better on GPS (the awkwardly titled CNN show he hosts; click here for Part 1 and here for Part 2), remembering at least to ask Rubin whether he regretted his deregulatory policies during the Clinton administration. Rubin replied that regulating derivatives would have been politically impossible. Zakaria didn't follow up by noting the well-publicized collapse of Long Term Capital Management. On neither show was Rubin asked what role he may have played in Citigroup's loading up on mortgage-backed securities polluted by subprime loans. Zakaria (who is thanked in the acknowledgments to Rubin's memoir for reviewing the manuscript) set the tone at the start of his interview by quoting Clinton's description of Rubin as "the most effective Treasury secretary since Alexander Hamilton."

It's time to reconsider that judgment. Rubin has been widely touted for Treasury secretary in an Obama administration, but in the GPS interview Rubin wisely removed himself from consideration. Perhaps he knows that Senate Republicans would never question him as gently as Zakaria and Schieffer did.